Standards Development

Scope

This standard provides specifications and guidance for the process of preparing natural capital accounts. Natural capital accounting is a systematic way of collating financial, socio-economic and environmental information about an organization’s impacts and dependencies on nature and presenting it in formats that are familiar to decision makers. Such accounts enable organizations to see all the information in one place, think about their impacts and dependencies in a holistic way, and prioritise ‘material impacts and dependencies’. The standard ensures the whole process is transparent by requiring the documentation of scope, data, assumptions, gaps and implications of all these on the way accounts are interpreted for decision making.

There are two key natural capital accounting outputs prescribed – each with supporting schedules:

a) a Natural Capital Balance Sheet (NCBS) shows an organization’s dependency on natural capital assets. It mimics a financial balance sheet so far as it shows the (natural capital) asset values and (natural capital maintenance) liabilities. The two key differences are that a NCBS (i) documents the asset values to the organization and the rest of the society, when financial accounts only show the former and (ii) is forward looking, i.e. projects and compares asset values and liabilities into the future, when financial accounts show past performance.

The NCBS can have two scopes: Scope 1 for the natural capital assets which the organization owns or has legal or voluntary responsibility and Scope 2 for natural capital assets owned by others. Assets that are not owned by anyone, e.g. public goods, might be included in Scope 1 or Scope 2 depending on the organization and materiality of its impacts and dependencies.

b) a Natural Capital Income Statement (NCIS) shows the organization’s impacts on natural capital assets. It mimics a financial income statement so far as it shows the positive impacts (the enhancements) and negative ones (degradations). Again, like its financial counterpart, NCIS looks at the past performance during the financial year to date.

The NCIS can have two scopes: Scope 1 for the impacts from the organization’s own operations and Scope 2 for the impacts attributed to the organization through the operations of its value chain.

Natural capital accounting is a rare offer of holistic treatment of all data with focus on natural capital assets, such as water, forests, atmosphere, etc. as opposed to tools or approaches developed on a single-issue basis. It is a structure within which the outputs from all such tools and approaches can be gathered and interpreted together. Working within a natural capital accounting structure will help organizations identify and prioritise their data needs and select the most appropriate approaches that will support their decisions.

Natural capital accounting will also help organizations align with the Taskforce for Climate related Financial Disclosures (TCFD), Taskforce for Nature related Financial Disclosures (TNFD), the future requirements from International Sustainability Standards Board (ISSB), guidance from EFRAG for Corporate Sustainability Reporting Directive (CSRD), and taxonomies developed for sustainable finance.

The target audience of a natural capital account is strategic and operational decision makers in organizations, in particular, accounting, finance, risk assessment and management professionals, and C-suite executives. Through its ability to bring all information together and make it relevant for the financial sustainability of an organization, natural capital accounting is capable of changing the understanding of nature for these decision makers from a regulatory burden, the cost of which needs to be minimised, to an asset to be invested in. It is this reframing that we must achieve if we want organizations to manage their impacts and dependencies for the sustainability of their finance, for nature, and society.

Natural capital accounting, and hence this standard, is applicable to organizations of all types (public, third sector and listed and unlisted private) across all sectors, and of any size (such as SMEs and larger businesses) and is relevant to one or more sites in which they operate. A group of organizations dependent on the same natural capital assets, or considering collaborating to change their impacts, may produce joint natural capital accounts. This standard does not apply to national or sector-wide natural capital accounts, but its principles are aligned to those developed by the UN System of Environmental-Economic Accounting – Ecosystem Accounting (UN SEEA-EA) within the context of the System of National Accounts.

The preparation of natural capital accounts requires multidisciplinary teams including environmental and sustainability professionals, accountants, and economists, among others to help organizations embrace the complexity of nature without limiting the values of it to financial (cashflow) data. 

Purpose

What is Natural Capital Accounting and why a standard is needed:

Natural capital is the stock of the elements of nature that provide benefits to society, such as forests, fisheries, rivers, biodiversity, soils, minerals, the atmosphere and oceans, as well as natural processes and functions. Natural capital includes both the living and non-living aspects of ecosystems (as defined in BS 8632). All our lives, societies and economic activities depend on nature. The term ‘natural capital’ is used to emphasise the fact that a capital asset depreciates (in the case of natural capital, increasingly fast due to human pressure) but if we can maintain and enhance it, it will keep on giving.

There are many different calls on organizations to document how they understand and manage their relationship with nature. It is a dynamic space filled with methods, tools, data, and requirements. A lot of these requirements have been released since the British Standard BS 8632 ‘Natural Capital Accounting for Organizations – Specification’ was published. In addition, investors are requiring new types of data that organizations are not used to providing through their financial or sustainability reporting. A number of free and paid-for tools and/or approaches on offer provide ‘black box’ solutions providing outputs or results without much engagement with decision makers or experts or the flexibility to adapt to the context of the organization and its relationship with nature.

As recognized in BS 8632, the process of preparing the natural capital accounts is just as informative as the numbers produced at the end. This is partly because nature is complex and no analytical approach can be complete. Decision makers need to embrace this complexity but they need help in doing this. This is why BS 8632 emphasises how to prepare accounts, as well as what should be included in them, and how the process should be documented for transparency.

In short, there is a growing need for standardized approaches, metrics and analyses to assess and value natural capital, to create an inclusive process, to communicate the process and the results, and to allow an audit / assurance of them. The British Standard was developed to respond to this need. Now with the increased need, the standard needs to grow further to reflect developments since its publication and capture the increasing auditing / assurance demands.

Market evidence:

The Capitals Coalition annual report provides clear evidence of a step change in global awareness and action around the value of nature and the need to address natural, social, human and economic challenges collectively through a value-led approach to decision-making. It can be accessed https: //capitalscoalition.org/wp-content/uploads/2022/05/Final_Our-Value-Report-2022.pdf.

The Capitals Coalition database of capitals assessments carried out by organizations across the global community reflects that there is a growing global demand for natural, and other capitals, accounting. The database can be accessed at: https://capitalscoalition.org/impact/case-studies/? fwp_filter_tabs=case_study It is not possible to point to an equivalent database of natural capital accounts as the vast majority of these are not published. However, the BSI webinar marking the first anniversary of BS 8632 featured three case studies exploring how the standard has been implemented locally, nationally, and internationally (Northumbrian Water, Transport for London, and Olam Food Ingredients). The recording of the webinar can be accessed here: https://www.bsigroup.com/en-GB/ourservices/events/webinars/2022/bs-86322021-natural-capital-accounting-for-organizations/ TNFD, which published the version 0.3 of its beta framework in November 2022, calls for businesses and the finance sector to identify and assess their nature-related impacts, dependencies, risks and opportunities. It offers guidance on metrics and approaches and makes recommendations for disclosure. Natural capital accounting will be a great tool for organizations to show compliance with TNFD requirements. The latest TNFD documentation can be found here: https://framework.tnfd. global/downloads/

It is not only the natural capital community that is talking about natural capital accounting. The global annual summit of the Open Data Institute covered the availability of data for environmental accounting and auditing / assurance: https://summit2022.theodi.org/

The EFRAG consultation for the European Commission’s proposal for a Corporate Sustainability Reporting Directive (CSRD) (https://www.efrag.org/lab3) requires organizations to understand and report on their relationship with nature. There are many frameworks and approaches for this, some of which were also reviewed in this document by the Value Accounting Network: https://capitalscoalition. org/value-accounting-methods/, but there is no formal standard created by a national standards institution other than BS 8632.

The newly created International Sustainability Standards Board (ISSB) is still focused on separate ESG reporting, rather than the more integrated accounting approach advocated by BS 8632.

Key market challenges the standard will address:

A key challenge is that nature is complex. Understanding our impacts and dependencies on it and how these affect us is even more so: for example, how pollution of the local water source results in increased costs of water supply, as well as killing fish species, limiting our recreational opportunities, and affecting human health. Some of this complexity is inherent. Some, on the other hand, stems from environmental sciences and environmental economics being new subjects for decision makers managing organizations or data and analysis providers they tend to procure from.

A specific aim of natural capital accounting is to reduce this complexity by collating all the data in one place and presenting it in formats that are familiar and meaningful for decision makers. No format is more familiar and effective than financial accounts. This is why natural capital accounting mirrors the format of balance sheet and income statement. However, financial accountants / auditors, and even ESG data providers do not have the necessary mix of skills and experience within their areas of expertise.

Data that is inputted to natural capital accounting includes environmental data on the quality and quantity of natural capital stocks, changes in such stocks due to the organization or other reasons, and provision of the flows of benefits that may be financial, social, environmental, or human health and wellbeing. This information can help organizations identify which impacts and dependencies are material for their organization and nature; what changes may be necessary to their business model / economic activity to ensure their natural asset base is sustained; and enables them to communicate this information with their internal and external stakeholders, including their investors.

Why an ISO standard:

An international standard is required in order to ensure natural capital accounting is a permanent part of global organizational accounting and decision making and appeals to a mix of users and beneficiary groups (environmental, business, accounting, finance etc). The existing British Standard was written to be internationally applicable, and this ensures that the specification can be developed further and accepted internationally.

In this fast developing and still confusing area of work, a trusted organization like ISO has an important role to play. An ISO standard can help organizations by offering more detailed and systematic guidance than is currently available from TCFD, TNFD, ISSB and others mentioned above.

An ISO standard will also have the convening power to attract an international and multidisciplinary team to draft the standard. The resulting standard will be more relevant to different international contexts, as well as reflecting different disciplinary perspectives, approaches and data. This international angle would improve the acceptance and uptake of the standard internationally.

In summary, developing the standard through ISO ensures there is an internationally recognised repeatable process for natural capital accounting. The benefit of this includes greater international consistency and credibility in natural capital accounting, which in turn, helps to increase the number of organizations and stakeholders seeking to undertake natural capital accounting. The convening power of ISO means the standard can rise above the multiple industry frameworks and bring together international expertise to develop a standard that can affect a demonstrable change in businesses’ relationship with nature.